Regulatory Headaches Worsen for J.P. Morgan

By Dan Fitzpatrick

James Dimon has turned J.P. Morgan's focus to compliance.

Associated Press

Regulatory headaches keep piling up for J.P. Morgan Chase & Co.

A growing number of lawsuits and investigations could force the nation’s largest bank to absorb $6.8 billion in future legal losses above its existing reserves, according to a filing earlier this month. That amount is greater than any other U.S. bank, according to an analysis from Barclays Research, a unit of Barclays PLC.

The numbers put J.P. Morgan on pace to supplant Bank of America Corp. as the big lender with the most legal problems. Since early 2010 only Charlotte, N.C.-based Bank of America has paid out more in legal costs and settlements, according to Barclays’ analysis.

J.P. Morgan faces six separate investigations from the U.S. Justice Department, according to the filing, three of which hadn’t previously been disclosed.

The bank also said in the same filing that it is responding to questions from an antibribery unit of the Securities and Exchange Commission about its hiring practices in Hong Kong. The agency asked the bank to provide information about J.P. Morgan’s “business relationships with certain clients,” according to the filing. The New York Times reported Saturday that the SEC was specifically looking into the bank’s hiring of Chinese officials’ children and how those hires may have helped the U.S. bank win business.

The bank is “fully cooperating with regulators,” a spokeswoman said, referring to the SEC investigation. The company declined further comment about its larger regulatory issues. A spokeswoman for the SEC declined to comment.

The newly disclosed problems open up a another set of challenges for J.P. Morgan and its chief executive officer, James Dimon, as the bank tries to move past the 2012 “London whale” trading fiasco that raised larger questions about oversight at a company that emerged from the financial crisis with a reputation as Wall Street’s best risk manager. It already is operating under four enforcement actions requiring fixes to various risk-management and anti-money-laundering controls, more than any other big bank, with more expected. Hundreds of employees have been redeployed within the bank to deal with the mounting requests.

Privately, bank officials say they are erring on the side of caution and disclosing inquiries they might not have revealed before. The SEC inquiry, for example, was a voluntary request for information as opposed to a more serious subpoena, said a person close to the bank. Still, bank executives acknowledge it will take years to address all its problems and regain the trust of regulators.

The heightened scrutiny from U.S. overseers is emerging as the toughest challenge for Mr. Dimon since he became CEO in 2005.

The 57-year-old bank boss anticipated the intense scrutiny from Washington, D.C., when the bank revealed billions in losses last year from a series of botched trades, said a person familiar with Mr. Dimon’s thinking. Inside the bank he has identified compliance as the bank’s top priority, while putting new projects on hold so his team could focus on the many problems. One person close to him close to him said he has been intensely focused on these issues from the start, and has been vocal and energetic about fixing problems.

But some current and former executives say it took Mr. Dimon too long to shed a combative stance with regulators and devote meaningful resources to the compliance effort. In April the bank’s two top regulators told Mr. Dimon and his board that they had lost trust in management, said people familiar with the meeting.

The internal effort to deal with a litany of problems ramped up late last year. The bank added a new companywide Oversight & Control Group that now supervises more than 20 initiatives designed to improve J.P. Morgan’s internal controls. J.P. Morgan Chief Operating Officer Matt Zames is overseeing the effort. Frank Bisignano, a longtime lieutenant of Mr. Dimon, had been helping Mr. Zames with the effort, but Mr. Bisignano left the bank in April to become chief executive of Atlanta processing firm First Data Corp.

“We are approaching this entire effort with the same level of rigor and discipline we bring to everything we do, from major mergers to large-scale re-engineering programs,” Mr. Dimon said earlier this year in a letter to shareholders.

What is likely to drag out the pain for J.P. Morgan is that regulators and government investigators are still working through a backlog of cases focused on banks’ activities during the housing downturn and financial crisis. The bank said earlier this month that the Justice Department has reached a preliminary conclusion that civil securities laws were broken while J.P. Morgan sold mortgage-backed securities from 2005 to 2007. The Justice Department also is conducting a criminal investigation into the matter.

The Justice Department, the SEC and the Special Inspector General for the Troubled Asset Relief Program also have asked the bank for information surrounding a review of “communications with counter parties in connection with certain mortgage-backed securities transactions.”

One other new headache revealed by J.P. Morgan in its recent filing is an investigation by federal regulators and attorneys into its compliance with specific rules concerning the origination of mortgages that it had insured by the Federal Housing Administration, a government mortgage program. Similar action already has been taken against rivals Wells Fargo & Co., Bank of America, and Citigroup Inc. Wells is contesting the government’s claims in court, while Bank of America and Citigroup have reached settlements.

Other banks that have disclosed investigations recently include U.S. Bank, SunTrust Banks Inc., and PNC Financial Services Group Inc.

The FHA has stepped up enforcement actions over the past two years as rising losses have threatened to wipe out its reserves. The Obama administration in April forecast a potential loss of less than $1 billion for the FHA this year.